A lively discussion / debate took place on Retailwire.com about whether retailers were using chargebacks as justifiable penalties for poor performance by vendors or an unjustified means of generating income for the retailers.

The fact is that fees, discounts and chargebacks are becoming more common, and in private conversations – when no retail customer is within earshot – vendors will verify this. Retailers say that such chargebacks are only compensation for vendors not complying with processes that have been clearly laid down and agreed to, since non-compliance creates extra costs for the retailer, or loses the retailer margin.

But is vendor performance really becoming worse with each passing season? Or is it that difficult trading conditions or insufficient skills are making buyers take this easy road to margin?

It’s an open secret that merchandise quality and delays – the two most common causes for chargebacks – are easily overlooked when the market is hot and the product is in demand.

Chargebacks are a dangerous tool in the hands of a lazy, short-term thinking buyer who is incentivised on gross/realised margins from season to season; to him/her they are a quicker way to get to that bonus check for the season. Pragmatic vendors, for the most part, don’t want to antagonise the buyer because that risks not just business with the current retail customer, but any retailer that the buyer moves to in the future.

It’s ironic that vendors are mainly cited as “partners” when it comes to sharing the retailer’s pain. I don’t recall any retailer calling such vendor-partners up to a stage for distributing checks to share extra margin in particularly profitable years. Comments are welcome from anyone who can remember that happening; we’ll all have something inspiring to quote in industry meets, then. (And I’m really hoping some comments quoting such incidents will appear soon!)

The Retailwire discussion on this topic (with comments justifying both sides) is here – “Clothing Vendors Take a Chargeback Hit” – and the original article in Crain’s New York Business is here – “Retailer fee frenzy hits designers“.

India has been consistently rated amongst the top destinations for consumer businesses year after year. While international fashion brands had earlier entered India at a steady pace, there was a greater surge of the global brands in the Indian market since 2002.

Interestingly many international brands opted to choose the franchise route for their entry into India. There were changes in the market environment and government policies that made the business environment favourable for growth through franchising.

Firstly, as a signatory of the WTO, India reduced import duties consistently. Consequently products could be sourced from other countries at more competitive prices and international brands could create an internationally-consistent product offering, with greater control on the supply chain.

Secondly, with more international brands vying for a share of consumer’s wallet, there was a need for brands to create a distinctive brand identity. Exclusive branded outlets increasingly became a marketing tool through which the brands could not only showcase a complete product range but also create the full brand experience.

Simultaneously the real estate market grew significantly, bringing in many “investors” who did not have the capability or the desire to develop their own brand. The availability of potential master franchises ready to invest capital and real estate created an environment conducive for growth of franchising.

As per Third Eyesight’s report (“Global Fashion Brands: Tryst with India”), by the end of 2008, just under half of the brands were present through a franchise or distribution relationship.

Unlike more developed markets where brands have sizable networks of large-format store as a launch and growth platform, in India there are still limited choices to simply “plug-and-play” using department stores or any other large-format retail network. Also, having a local partner as a franchisee provides a closer understanding of the market and the ability to adapt to changing consumer needs.

For a successful relationship it is vital that a franchisee should have an entrepreneurial mind-set. The essence of the brand needs be well understood, and the franchisee must have operational involvement rather than a “passive investment” approach.

The question is whether franchising would continue to remain the preferred entry mode as a new decade starts. Liberalisation of foreign investment norms has already led to many brands transitioning into a joint venture or subsidiaries. (See the more recent version of the report on International brands in India.)

However, while for many international brands it would be ideal to have ownership and control over the operations in a strategic market like India, direct investment does also increase their risk and the investment is not financial alone.

Therefore, for many brands, franchising would still remain the more practical choice whether by using a national master franchisee or using site-specific franchise relationships in combination with a direct wholesale presence in India.

An article in the San Francisco Chronicle sparked off a debate on whether ecologically friendly can be mainstream, whether customers will switch from traditional to eco-friendly fashions and if so, when. There is the view that eco-friendly products are necessarily niche and cannot match up in fashionability and affordability to ‘mainstream’ products.

I don’t think it is an either/or choice between styling and eco-friendly. To sell, eco-friendly merchandise absolutely MUST be comparable to or better than eco-unfriendly merchandise, both in style and quality.

Pricing is another story. The article also quotes Joslin Van Arsdale (founder of Eco Citizen, a San Francisco boutique devoted to Earth-friendly clothing) as saying, “When it comes to buying green or price, the general public will more likely choose the cheaper item on anything, whether it’s fashion or tomatoes.”

While most consumers will not willingly pay higher prices for eco-friendly merchandise, that may change as the cost of being eco-unfriendly goes up through awareness and legislation. There was a time when safety belts in cars were optional at an extra cost. No one would argue against paying the extra price for safety today.

Perhaps many of us would rather trash the planet cheaply because we may not feel the heat within our lifetimes. That is no reason that others, who feel more responsible, will allow that to happen indefinitely.

One way or the other, eco-friendly merchandise will compare in price, too.

Some of the parity will come from reducing the cost of eco-friendly stuff, but the bulk will probably happen because the cost of being eco-unfriendly will go up.

The original article is here – “Green fashion has new cachet“.

If we were to look at phrases that have cropped up during the recent recessionary times in the consumer goods sector, “private label” has to be among those at the top of the list.

From clothing to cereals, toothpaste to televisions, there is hardly a category that has not seen retailers trying their hand at creating own labelled products.

The first motivation for most retailers to move into private label is margin. On first analysis, it appears that the branded suppliers are making tons of extra money by being out there in front of the consumer with a specific named product. The retailer finds that creating an alternative product under its own label allows it to capture extra gross margin. Typically the product category picked at the earliest stage of private label development would be one for which several generic or commodity suppliers are available.

At this early stage, the retailer is aiming for a relatively predictable, stable-demand and easily available product whose sales would be driven by the footfall that is already attracted into the store. A powerful bait to attract the customer is the visible reduction in price, as compared to a similar branded product. If the product can be compared like-for-like, customers would certainly convert to private label over time.

However, maintaining prices lower than brands can also be counter-productive. In many products, while customers might not be able to discern any qualitative difference, they may suspect that they are not getting a product comparable to one from a national or international brand. And while private label can drive off-take, the price differential can also erode gross margin which was the reason that the retailer may have got into private label in the first place. Over time, such a strategy can prove difficult to sustain, as costs of developing, sourcing and managing private label products move up.

The other strong reason a retailer chooses to have private label is to create a product offering that is differentiated from competitors who also offer brands that are similar or identical to the ones offered by the retailer. Department stores, supermarkets and hypermarkets around the world have all tried this approach – some have been more successful than others. The idea is to provide a customer strong reasons to visit their particular store, rather than any of the comparable competitors.

Of course, when differentiation is the operating factor, the products need more insight and development, and closer handling by the retailer at all stages. A price-driven private label line may be sourced from generic suppliers, but that approach isn’t good enough for a line driven by a differentiation strategy. In this case, costs of product development and management increase for the retailer. However, to compensate, the discount from a comparable national brand is not as high as generic nascent private label. In fact, some retailers have taken their private label to compete head on with national brands – they treat their private labels as respectfully as a national branded supplier would treat its brand.

So what does it take to go from a “copycat” to being a real brand?

Third Eyesight has evolved a Private Label Maturity Model (see the accompanying graphic) that can help retailers think through their approach to private label, whether their product offering is dominated by private label, or whether they have only just begun considering the possibility of including private label in their product range. The model sketches out a maturity path on five parameters that are affected by or influence the strength of a retailer’s private label offering:

• consumer knowledge and insight
• product design and quality
• pricing
• promotion
• supply chain & sourcing

(Click here for a larger image)

In some cases, retailers may have multiple labels, some of which may be quite nascent while others might be highly evolved, clear and comparable to a national brand. This could be by default, because the labels have been launched at different times and have had more or less time to evolve. However, this can also be used as a conscious strategy to target various segments and competitive brands differently, depending on the strength of the competition and their relationship with the consumer.

The interesting thing is that size and scale do not offer any specific advantage to becoming a more sophisticated private label player. Some extremely large retailers continue to follow a discounted-price “me-too” private label strategy where even the packaging and colours of the product are copied from national brands, while much smaller players demonstrate capabilities to understand their specific consumers’ needs to design, source and promote proprietary products that compare with the best brands in the market.

For a moment, let’s also look at private labels from the suppliers’ point of view. As far as we can see, private label seems to be here to stay and grow. Suppliers can treat private labels as a threat, and figure out how to ensure that they retain a certain visibility and relationship with the consumer. On the other hand, interestingly, some suppliers are also looking at private label as an opportunity. They see the growth of private label as inevitable, and would much rather collaborate in the retailer’s private label development efforts. This way they can maintain some kind of influence on the product development, possibly avoid direct head-on conflict with their own star branded products and, if everything else fails, at least grab a share of the market that would have otherwise gone over to generic suppliers.

If you are retailer, I would suggest using the Private Label Maturity Model to clarify where you want to position yourself, and continue to use it as a guide as you develop and deliver your private label offering.

If you are a supplier concerned about private label, my suggestion would be to gauge how developed your customer is and is likely to become, and ensure that you are at least in step, if not a step ahead.

Of course, if you need support, we’ll only be too happy to help! (Contact Third Eyesight to discuss your private label needs.)

Just after noon, on a weekday, I bumped into a family acquaintance at one of the more successful shopping malls in the city.

The question, “What are you doing here?” was underlined by a mildly accusatory look and the subtext, “Why are you spending a week-day shopping?”

My response that I was “working” wasn’t enough; the further explanation that I was doing “research” received a dismissive smirk and ended the conversation. The fact is that I was repeating the time-honoured ritual of RBWA (research by walking around), with its seemingly aimless strolling, sidelong glances, and possibly turning over a hundred items in a dozen shops without reaching for the wallet even once. This is a ritual that is not taught in our temples of management learning. In fact, it is one of the many tens of methodologies that seem to be missed out during the course of our formal education. And very often, what we do get taught is so remote and opaque to most people that they will promptly forget it the moment they walk out of the examination hall.

I was reminded of this walk-about incident during a conversation with two members of the faculty of a professional institute on the subject of research. Most of their students, I had observed, had a narrow interpretation of research – focussed only on consumers being interrogated through a questionnaire. The students were working from the guidance they had received during the previous semesters at the institute.

Unfortunately, the students are not alone – this is also how too many people identify research, including many executives in decision-making positions. I have been frequently puzzled by the confident (brash?) statement I have heard many times: “We don’t need research.” It is only when I probe further do I, and they, discover that while they perhaps don’t need consumer surveys, there are large gaps in their decision making toolkit which can only be filled by inputs from various other kinds of research.

Sometimes the roots of that statement lie in the perception of research as an impenetrable jungle in which it is easy to get lost but difficult to find something immediately useful. Researchers, like all other vocations, have their own professional shorthand (also known as “jargon”) which they sometimes use to identify their own kind, and perhaps sometimes to exclude people who are not from the trade. Very often this jungle is created by “research-as-a-foreign-language”, which many executives are just too apprehensive or too busy to tackle.

But before you pick up the axe and start cutting away at the creepers of bi-variate analysis, quota samples, correlation and projective techniques, let me give you my very simple definition of research which I like to keep in mind when I am asked the question: “Do we need research?”

To me, research is the discovery and collation of diverse pieces of information from various sources, so that it can be analysed using multiple tools, to discover relationships, patterns and directions that can be used to draw conclusions and take decisions.

There is a purpose for which we would discover or collate that information. There may be a set of questions that we need to answer. We need to understand what are the various places where that information may lie, the different forms it might take or the different ways in which we might need to look at the information before anything useful emerges.

And, in the business context (as in many other situations), research is meant to come up with something that is applicable and directly beneficial to the business. So once we’ve got most of the answers we were looking for, it is certainly useful to stop and apply the newly gained knowledge rather than try to refine and perfect it to the infinite degree.

If this definition of research frames the context well enough for you, then you’re on the way to doing and using research well.

Despite the wealth of information available today, far too many bad business decisions are being made in the absence of good information, either because the executives have not bothered to carry out research, or have not had the capability or the time to question the research which is being presented to them.

Worse – perhaps because of the abundant data and the ease of access to it – today many business decisions that turn bad are taken on the basis of information that is presented by someone else (“secondary research” in research language), without questioning the validity of the conclusions, the structure of the study, the context in which the data was analysed. It’s almost as if we couldn’t be bothered to think, because someone has apparently already done the thinking for us – especially if it comes from a “reputable source”. (Ok, that might be smart sometimes. So let me give you a more graphic analogy – could you think of an adult bird regurgitating pre-digested food to feed the chicks? Hmm, not so pleasant an image after all, is it?)

Also, research (especially the number-oriented kind) seems too dry for most people to take in. And I think that is one place market researchers could do themselves a huge benefit if they could tell the story – especially a story with a moral at the end. That is, create the picture for the user as to what all of that information means in simple language, and also show the user how to use the information in the context of his situation or problem. Bedtime stories during childhood and good movies in adulthood work well because there is a coherent narrative, a start, a middle that is interesting and an ending that stays in the mind. You can see the relationships between the characters, and the consequences of those relationships. A good research project report could be seen as something very similar.

Having said that, of course, there are also some researchers go far beyond, who would never let boring facts get in the way of a good story! Apparently a letter to the editor of the National Observer (London) as far back as 1891 complained: “there are three kinds of falsehood: the first is a ‘fib,’ the second is a downright lie, and the third and most aggravated is statistics.” (Mark Twain famously paraphrased this in his autobiography as “lies, damned lies and statistics”.)

How many stores can you think of which are located at sites where their chances of success are exactly the same as that of a snowball in hell? How many products or brand launches come to mind, where you wondered, “what is this company thinking?!” Of course, there would have been pre-launch studies which would have showed just how successful these would be, where the stories were possibly based more on imagination than on facts.

For a decision-maker, the only way to tell the difference between bad statistics (lies) and the true story of the market is to make sure that he or she is equipped with multiple sources of information, and various tools with which to analyse them. Also, if you recall my earlier definition of research, the starting point was the definition of the objectives which a research is supposed to fulfil – if the objectives are vague or undefined, so will the research outputs be.

Numbers (quantitative research) and narrative (qualitative research) can tell us many wonderful stories about the market. Some of those stories are highly imaginative “fairy tales” because of a bad study – that shouldn’t lead us to ignore all the others which can direct us to our objectives.